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Distinguishing Personal and Business Goodwill: Planning Strategies to Minimize Tax Liability

Note: CLE credit is not offered on this program

Recording of a 110-minute CPE webinar with Q&A

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Conducted on Thursday, November 11, 2021

Recorded event now available

This course will discuss strategies for businesses and individuals to minimize tax when separating business and personal goodwill. Our panel of income tax experts will review the traits of each and notable cases, including Martin Ice Cream Co. v. Commissioner.

Description

"Goodwill is the value of a trade or business attributable to the expectation of continued customer patronage. This expectation may be due to the name or reputation of a trade or business or any other factor." Treasury regulation Section 1.197-2(b)(1). When entering into a merger or acquisition transaction, consequences can differ greatly depending upon the owner of that goodwill. The determination has substantial consequences for tax, mergers and acquisitions, and division of marital assets.

Enterprise and individual goodwill have different characteristics. For example, for business goodwill, customer loyalty may be tied to pricing, location, or convenience, while individual goodwill is based on customer relationships, knowledge, and experience. Although personal goodwill is usually associated with personal service businesses like accounting, physicians, and attorneys, almost every closely held company has some value attributable to personal goodwill.

Does the individual still own their personal goodwill? Even where an individual has created personal goodwill or performs activities that would seemingly create personal goodwill, it is important to understand whether the individual has previously transferred that goodwill to an entity through an employment or non-compete agreement.

Purchase price allocations have significant tax consequences for both buyers and sellers. Buyers may not pay for personal, non-transferable goodwill, sellers may want more allocated to goodwill and less to fixed assets, and C corporation sellers do not want to suffer two layers of tax.

Listen as our panel of experts explains the characteristics of personal and enterprise goodwill, valuation methods, and the impact of the division on income tax liability.

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Outline

  1. Goodwill
  2. Characteristics of goodwill
    1. Business
    2. Personal
  3. Tax considerations
  4. Valuation methods
  5. Martin Ice Cream Co. v. Commissioner and other notable cases
  6. State considerations

Benefits

The panel will review these and other key issues:

  • Specific characteristics of personal goodwill
  • The tax effects of goodwill divisions when businesses are sold
  • Methods used to value personal vs. business goodwill
  • The effect of noncompete agreements on the division of goodwill

Faculty

Gruidl, Nick
Nick Gruidl
Partner, Washington National Tax
RSM US

Mr. Gruidl has experience working with both publicly held and privately held businesses. His client service focus...  |  Read More

Roper, Cathy
Cathy Roper, CPA/ABV, CVA, CFE, CGMA
Managing Partner
Roper Consulting Group

Ms. Roper works with attorneys and clients either as a consultant or as their testifying expert regarding the value of...  |  Read More